Analyst Says Costco's 47x P/E Is Justified Amid Retail Resilience

(P1) Neuberger Berman sees continued strength in consumer spending, arguing that premium valuations for retailers like Costco Wholesale (COST) and Walmart (WMT) are justified in a post-Amazon world.

(P2) "It has become obvious since the launch of Amazon.com that there will be fewer winners in retailing," John San Marco, senior research analyst at Neuberger Berman, said in an interview. "That is the justification for the winners earning high valuations."

(P3) The view comes as Costco trades at 47 times forward earnings and Walmart at 41.2 times. San Marco, whose coverage includes about 50 retail stocks, believes the consensus view on consumer spending is "too negative," even with rising energy prices.

(P4) The analysis suggests investors should stick with quality, as a divergence in consumer fortunes favors higher-end retailers. San Marco's thesis hinges on the consumer's ability to absorb higher gas prices, with the upper-income cohort sitting on $15 trillion in home-equity gains.

Underappreciated Opportunities

Beyond the large-cap leaders, San Marco highlighted several companies he believes are being misjudged by the market. He pointed to Floor & Decor Holdings (FND), trading at 22 times this year's estimates, as a business whose strength is being conflated with the negative housing cycle.

"The moves that the company has made around its cost structure and product assortment have positioned it for accelerated earnings growth when the housing market recovers," San Marco noted. He frames Home Depot (HD) similarly, arguing the market is missing improvements made during the downturn.

The Bull Case for Dollar Tree

The most underappreciated retailer, according to San Marco, is Dollar Tree (DLTR), which trades at 15 times forward earnings. He argues that investor skepticism following the Family Dollar acquisition is overblown, especially now that the unit has been divested.

"Our work around the value that Dollar Tree offers with multiprices and the in-store execution suggests there is too much skepticism among investors," he said. San Marco believes the company is positioned to capture consumers trading down if food prices reflate.

The analyst's remarks indicate that value can be found across the retail landscape, from premium-valued leaders to overlooked turnaround stories. Investors will be watching upcoming retail sales data and corporate earnings to see if this consumer resilience thesis holds.

This article is for informational purposes only and does not constitute investment advice.